Aug. 25--Detroit bankruptcy Judge Steven Rhodes today may consider whether to force attorneys for bond insurer Syncora to prove why they should not be subject to sanctions after they alleged that the city's bankruptcy mediators conspired to protect pensioners and the Detroit Institute of Arts at the expense of financial creditors.
After Syncora accused Detroit bankruptcy mediators Gerald Rosen and Eugene Driker of "naked favoritism," the city asked Rhodes last week to reject Syncora's accusations and consider ordering the insurer's attorneys to apologize formally or endure sanctions.
Alternatively, Rhodes could rule that Syncora's objections are worthy of consideration during a trial that will determine the fate of Detroit's sweeping restructuring plan.
Rhodes also will consider issues related to Detroit's exit financing and whether to accept tender offers the Detroit Water and Sewerage Department made to bondholders to buy back $1.5 billion in bonds that would be refinanced at lower interest rates. The buyback would save the agency as much as $241 million in debt payments over 27 years. The hearing on the water department is at 9 a.m. today.
But the Sycora issue is the latest spat between the city and the bond insurer that has inflamed what was already a bitter feud -- so much so that Rhodes instructed the two sides to stop using war analogies to describe their quarrels.
To be sure, Syncora's decision to question the integrity of the mediators was strategic -- though the city labeled it "false and defamatory," "sensationalized," and "designed to generate maximum press coverage."
"It seems that the tone is ramping up in an uncomfortable way," said Melissa Jacoby, a University of North Carolina-Chapel Hill bankruptcy law professor who is watching the case.
Syncora is bidding to weaken the core pillar of Detroit's bankruptcy restructuring plan: the grand bargain that would allow the city to accept $816 million in outside funding over 20 years in exchange for reducing pension cuts and transferring the city-owned DIA to an independent trust.
The insurer -- which could lose hundreds of millions on the bankruptcy -- argues that the grand bargain is blatantly illegal and that the city should get billions for the DIA.
The grand bargain was "the product of agenda-driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors and, remarkably, the city itself," Syncora attorneys said in their filing.
They cited Rosen's public statements -- especially his remark that the grand bargain is "about Detroit's retirees who have given decades and decades of their lives devoted to Detroit" -- and Driker's wife's former membership on the DIA board as examples of improper biases.
But Detroit emergency manager Kevyn Orr has said the grand bargain amounts to a historic philanthropic effort to help end the largest Chapter 9 bankruptcy in U.S. history and should win the judge's approval following the trial set to begin Sept. 2.
The city's Jones Day bankruptcy lawyers pointed out that Driker disclosed his wife's ties to the DIA in a Sept. 9, 2013 e-mail to Detroit creditors, including Syncora.
"It is Syncora that has crossed the line," Jones Day attorneys argued. "The mediators thus deserve praise, not condemnation, for facilitating this win-win arrangement."
Wayne State University bankruptcy law professor Laura Beth Bartell predicted that Syncora's accusations won't get any traction with Rhodes.
"I was very surprised," she said. "It's a no-win tactic. I just don't see what they can possibly hope to gain from it."
Jacoby said potential sanctions could theoretically include fines payable to the court or to the city -- or potentially an order for a formal apology.
Rhodes will conduct a hearing at 4 p.m. today to rule on whether Syncora's objection will be considered during the bankruptcy trial -- or whether Syncora attorneys should be chastised for their aggressiveness.
If Rhodes imposes sanctions, it could affect Sycora's legal team of James Sprayregen, Stephen Hackney and Ryan Bennett with the Kirkland & Ellis law firm of Chicago, and McDonald Hopkins attorneys Stephen M. Gross and Joshua Gadharf, based in Bloomfield Hills.
"You pull it all together and it was maybe well intentioned -- and we understand the desire to protect the art and the pensioners -- but the rule of law still applies in America and this process was unfairly skewed from the beginning to the end," Sprayregen said in a recent interview.
Wayne State's Bartell said sanctions could backfire because it could give Syncora cause for appeal.
"I suppose the city probably felt it wanted to align itself on the right side with Judge Rosen and Eugene Driker," she said. "These are very important people in the city of Detroit."
That Syncora publicly charged the mediators with violating judicial codes of conduct by conspiring to achieve their own politically motivated goals was particularly surprising to experts who are watching the case.
"That is a very severe allegation for a creditor to make or for any party to make," Jacoby said.
Syncora and fellow bond insurer Financial Guaranty Insurance Co. face steep losses because they guaranteed payments on a $1.4-billion debt deal Mayor Kwame Kilpatrick's administration engineered in 2005 to eliminate the city's unfunded pension liabilities. The city now argues that the entire deal was illegal and should be wiped out.
Contact Nathan Bomey: 313-223-4743 or email@example.com. Follow him on Twitter @NathanBomey.
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